How to Trade the RCT Pattern: Risk First, Profits Second

Trading the RCT pattern can help overcome one of the most common mistakes new traders make.

How?

By putting risk before reward.

The RCT pattern sets up when a stock makes a parabolic move and then pulls back to form a red 5-minute candle.

That red candle defines two parts of a solid trade plan: the entry, and the stop loss.

But it also gives a clue about something else…

And it’s one of the keys to successful trading…

The Big Picture

In part 1 you learned how to recognize the RCT pattern. Part 2 showed you how to create a structured trade plan using the RCT as a reference.

Now, let’s add a layer. For review we’ll look at Skycorp Solar Group LTD (NASDAQ: PN):

PN checked all the boxes in after-hours trading on May 1:

• The company announced a $3M private placement
• Low Float: 1.2M
• Volume spike with vertical move
• PN pulled back and set the RCT at $4.55 x $4.35, which means the risk was $0.20 per share.

Risk First, Profits Second

We always determine where we’re wrong first. Most traders buy a stock and then try to figure it out. It’s like they start building the plane in the air.

We don’t build airplanes in the air. We figure out the trade plan before we hit the buy button.

Again, this is where so many struggling traders mess up. They do their due diligence after they buy the stock. That’s the exact opposite of the way a professional does it.

Do your due diligence before you enter because once you’ve bought the stock, you own it.

So, now you know your entry and you know your stop loss. You’ve solved the equation and you can use that to determine your position size.

How to Use RCT To Determine Your Position Size

My rule about risk is to know the exact dollar amount you’re willing to lose.

Using the PN chart as an example, let’s say you’re willing to lose $100. Your risk is $0.20 per share. $100 divided by $0.20 = 500.

So, you would buy 500 shares to risk $100. Assuming your target is 4:1 reward-to-risk, you would be risking $100 to make $400 (500 x $0.80 = $400)

Let’s recap:

1. You recognize an RCT pattern based on the criteria from part 1: Recognition
2. You create a trade plan as described in part 2: Build a Structured Trade Plan.
3. You know the dollar amount you’re willing to risk. And you use that number determine your position size.

As long as you follow your plan, that’s how it’s done.

My Take

Does every RCT trade work No. Every trade is different and losses are part of trading. But if you trade the plan and respect your risk, it’s a great pattern that can potentially help new traders to grow an account.

Watchlist

Yesterday (May 6) I called out another RCT during premarket prep. Ernexa Therapeutics (NASDAQ: ERNA) was another RCT box checker:

• The company announced positive preclinical trial results
• Low float: 634.52k
• Huge volume compared to average
• It popped from $3.70 to $7.23 in five minutes before pulling back to set the RCT at $6.53 x $5.81. That’s wide and I would tighten it up if I was trading ERNA.

I figured ERNA was a failed RCT, which would have been a good example to show. But if you had it on your radar you could have taken a stab at it in the afternoon.

On My Radar

• Anthropic committed to spending $200 billion on Google Cloud over the next 5 years.
• All the more reason to own your own compute.
• And thanks to AI, Small modular reactors might finally live up to their promise